The financial health of English higher education institutions weakened in 2012-13 – but not by as much as expected, an analysis has found.

Operating surpluses are forecast to fall by 32 per cent compared with 2011-12 to £659 million, representing 2.7 per cent of income against 4.2 per cent in the previous year.

Cash flow is also expected to decline to 6.4 per cent of income, compared with 8.1 per cent in 2011-12.

But a report on the forecasts from the Higher Education Funding Council for England says that although the financial position of the sector has weakened and it continues to operate on fine margins, the short-term viability of institutions “is not a concern presently” and no institutions are close to the risk of insolvency.

The latest forecasts, looking ahead over the next four years “show that the sector expects to deliver a stronger financial performance than anticipated in December 2012”, it adds. Overall across the forecast period the sector is expecting sound surplus levels, good cash balances, and healthy and increasing reserves.

However, there continues to be a wide variation in the financial position of institutions across the sector, and small changes affecting income and expenditure could leave some facing big challenges.

The report says that forecasts for 2013-14, the second year of the new funding arrangements, show that the increase in tuition fee income from home and EU students outweighs the fall in public grant funding “as long as student recruitment levels hold”. But the additional income is outweighed by projected increases in staff costs, causing surpluses to fall.

Some of the forecast rise in income is attributed to continued growth in fees paid by overseas students, which is expected to stay strong despite tougher visa regulations.

But the report warns that “any reduction in the growth forecasts could have a major impact on the financial forecasts”.